Alternative Investment Fund (AIF)
Alternative Investment Funds (AIFs) are a category of privately pooled investment vehicles
that are distinct from traditional investments like stocks, bonds, and mutual funds. They
are designed for sophisticated investors, such as high-net-worth individuals and
institutions, who have a high-risk appetite and are looking for diversification and potentially
higher returns.
An AIF is a privately pooled investment vehicle that collects funds from a select group of
investors—both domestic and international—with the goal of investing in accordance with
a pre-defined investment policy. AIFs are regulated by the Securities and Exchange Board
of India (SEBI) but operate under a different framework than mutual funds. They are
typically structured as a trust, company, or Limited Liability Partnership (LLP).
How Alternative Investment Work
Pooled Investment Vehicle
Like a mutual fund, an AIF gathers money from multiple investors. However, unlike a mutual fund, this pool of capital is used to invest in non-traditional asset classes that are not easily accessible to the public. These can include private equity, venture capital, real estate, hedge funds, and more.
Investor Profile
AIFs are not for everyone. Due to their high-risk nature and illiquid assets, they are restricted to "sophisticated investors." This means there is a very high minimum investment requirement, often starting at ₹1 crore in India. This barrier to entry ensures that only investors with a significant risk tolerance and a long-term investment horizon can participate.
Categories of Alternative Investment
Category I AIFs:
Category I AIFs: These funds invest in sectors that are considered socially or economically desirable by the government. They often receive government incentives. This category includes: o Venture Capital Funds (VCFs): Invest in startups and early-stage companies with high growth potential. o SME Funds: Support small and medium-sized enterprises. o Infrastructure Funds: Invest in public projects like roads, ports, and power plants.
Category II AIFs
This is the most diverse category and a popular choice for private equity and debt investments. They are a "catch-all" for funds that don't fit into Category I or III. They do not employ leverage (borrowing money for investment) except for day-to-day operations. This category includes: o Private Equity (PE) Funds: Invest in unlisted or private companies to help them grow. o Debt Funds: Invest in the debt securities of unlisted companies
Category III AIFs
These funds employ complex and aggressive trading strategies to generate short-term returns. They are allowed to use leverage and invest in a mix of listed and unlisted derivatives. This category includes: o Hedge Funds: Use advanced strategies like short selling and arbitrage to profit from market inefficiencies. o Private Investment in Public Equity (PIPE) Funds: Invest in listed companies at a discount through private placements.
Fee Structure
AIF fees are generally higher and more complex than those of mutual funds. They often follow a "2 and 20" model: • Management Fee: A fixed annual fee, typically around 2% of the assets under management. • Carried Interest (Performance Fee): A portion of the profits (usually 20%) that the fund manager receives once the fund's returns exceed a pre-defined "hurdle rate."
Lock-in Period
AIFs are generally illiquid, meaning your money is locked in for a specific period, which can range from 3 to 10 years, depending on the fund's strategy. This is because the underlying investments, such as stakes in private companies or real estate, are not easily bought or sold on a daily basis.
Why Invest in an Alternative Investment
• Portfolio Diversification: AIFs provide access to assets that are often uncorrelated
with the stock market, which can help reduce overall portfolio risk.
• Potential for Higher Returns: The high-risk strategies and exposure to high-growth,
unlisted companies offer the potential for significant returns that may outperform
traditional investments.
• Professional Management: AIFs are managed by expert fund managers with
specialized knowledge in their niche, who conduct extensive due diligence and
active management.
Key Considerations and Risks
• High Investment Amount: The high minimum investment makes AIFs inaccessible
to most retail investors.
• Illiquidity: Your capital will be locked in for a long period, so you must be
comfortable with not having access to it.
• Higher Risk: Due to the complex strategies and high-growth, unproven assets, AIFs
carry a much higher risk than traditional investment vehicles.
• Lack of Transparency: While regulated by SEBI, AIFs do not offer the same level of
daily transparency and public disclosures as mutual funds.
FIXED INCOME INSTRUMENTS
Fixed-income instruments are investments that provide a fixed or predictable stream of
income to the investor. When you buy a fixed-income instrument, you are essentially
lending money to an issuer (a government or corporation) in exchange for regular interest
payments and the return of your principal at a specified maturity date. They are a core
component of a diversified portfolio, especially for investors seeking stability and regular
income.
Our blog post
Read our latest blog
Zepto Pre-IPO Unlisted Shares January 2026: Quick Commerce Boom
Posted By Equity Unlisted - 01/19/2026
OYO Pre-IPO Unlisted Shares 2026: Profitability Rally Ahead?
- Posted By Equity Unlisted
- 01/19/2026
MSEI Liquidity Scheme 2026: Unlisted Shares Revival Guide.
- Posted By Equity Unlisted
- 01/19/2026